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Edited Transcript of NEW.N earnings conference call or presentation 13-Aug-19 12:00pm GMT

Q2 2019 Puxin Ltd Earnings Call

Aug 15, 2019 (Thomson StreetEvents) -- Edited Transcript of Puxin Ltd earnings conference call or presentation Tuesday, August 13, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Peng Wang

Puxin Limited - CFO

* Yunlong Sha

Puxin Limited - Founder, Chairman & CEO

* Claire Yung

ICA

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Conference Call Participants

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* Tommy Wong

China Merchants Securities (HK) Co., Ltd, Research Division - Research Analyst

* Sharon Ling

CICC

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Presentation

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Operator [1]

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Good day, and welcome to the Puxin Limited Second Quarter 2019 Earnings Conference Call. (Operator Instructions) Please note that this event is being recorded.

I would now like to turn the conference over to Claire, please go ahead.

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Claire Yung, ICA [2]

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Thank you, operator. Hello, everyone, and thank you for joining Puxin's Second Quarter 2019 Earnings Conference Call. The company's results were released earlier today and are available on the company's IR website at ir.pxjy.com.

On the call today are Mr. Yunlong Sha, the company's Founder, Chairman and Chief Executive Officer; and Mr. Peng Wang, the Chief Financial Officer. Yunlong will give a brief overview of the company's business operations and highlights, followed by Peng, who will go through the financials and guidance. They will both be available to answer your questions during the Q&A session that follows.

I will remind you that this call may contain forward-looking statements made under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements are based on management's current expectations and current market and operating conditions and relate to events that involve known or unknown risks, uncertainties and other factors, all of which are difficult to predict and many of which are beyond the company's control, which may cause the company's actual results, performance or achievements to differ materially from those in the forward-looking statements. Further information regarding these and other risks, uncertainties and factors is included in the company's filings with the U.S. Securities and Exchange Commission. The company does not undertake any obligation to update any forward-looking statement as a result of new information, future events or otherwise, except as required under the law.

With that, I will now turn the call over to Mr. Sha. Mr. Sha will read through his prepared remarks in Chinese. I will translate for him in English. Mr. Sha, please go ahead.

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Yunlong Sha, Puxin Limited - Founder, Chairman & CEO [3]

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(foreign language)

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Peng Wang, Puxin Limited - CFO [4]

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Thank you, Mr. Sha, and hello, everyone -- oh, sorry. Now it's time for interpretation.

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Claire Yung, ICA [5]

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[Interpreted] Hello, everyone, and welcome to our second quarter earnings conference call. I'm pleased to report that we made solid progress during the second quarter. Net revenues grew 19.1% year-over-year to RMB 632 million, which is near the upper limit of our previous outlook. The solid performance was mainly driven by organic growth, especially in student enrollments, which increased by 39.5% to a total of 725,118 students during the quarter.

In terms of business lines, our K-12 education grew rapidly with a 30.4% year-over-year increase in revenue. We achieved this organic growth despite our modest approach to opening new learning centers during the quarter. In the meantime, what's particularly worth noting here is that our K-12 education's operating profit, excluding amortization, reached RMB 80 million during the first half of 2019.

We believe one of the key metrics to our after-school tutoring institutions is the retention rate. During the quarter, our retention rate reached 71.4%, an increase of 9.2 percentage point year-over-year. The growth benefited significantly from our approach to raise the customer value proposition. Specifically, we've dedicated our efforts to providing systematic learning plans at an early stage, along with a strong and stable teaching staff, leading to a notable rise in the quality of classroom content and learning experience. This productive approach helped us grow our market shares in lower-tier cities and the increase is especially evident in facilities that PBS has operated for more than 2 years.

If you look at our P&L, our gross profit for the quarter increased by 23.6% year-over-year, while our gross margin reached 47.4%, and increased by 1.7 percentage points year-over-year.

Gross profit margin reached 46.5% in the first half of 2019. Non-GAAP operating loss of 2019 Q2 decreased by 12.6% compared with the same period last year. Meanwhile, our net loss attributable to ordinary shareholders improved by 14.4%.

Overall, we are particularly pleased to have narrowed our loss while achieving such solid top line growth in the first half of 2019. Gross margin continues to stay above 45% and the pace of overall business growth is in tune with our corporate strategy.

Since the first quarter of 2019, Puxin has been investing heavily in online products and offerings to seamlessly integrate the online and offline learning experience. We have positioned online learning as a long-term emphasis in investment, one that we will patiently build and grow over time. In addition, new regulations in lower-tier cities have provided Puxin with more quality acquisition targets.

Looking ahead, we plan to stay the course and continue to push our "acquisition and integration" strategy, which we are confident will lead to very positive results for the second half of the year.

And with that, I would now like to turn the call over to Peng, who would go over the financials.

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Peng Wang, Puxin Limited - CFO [6]

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Thank you, Mr. Sha, and hello, everyone. Please be reminded that all amounts quoted here will be RMB and all percentage increases will be on a year-over-year basis unless otherwise stated. Please also refer to our earnings release for detailed information of our comparative financial performance on a year-over-year basis.

So to start, net revenues were CNY 632.9 million, an increase of 19.1% from the second quarter of 2018. This increase was primarily driven by increases in student enrollments. Student enrollments increased 39.5% to 725,000 from 520,000 during the same period of 2018.

Cost of revenues was CNY 332.8 million, an increase of 15.3% from the same period in 2018, primarily due to increase in teacher compensation. Non-GAAP cost of revenues, which excludes share-based compensation expenses, was CNY 331.7 million, an increase of 15.8% from the second quarter of 2018.

Gross profit was CNY 300.1 million, an increase of 23.6% from the same period of 2018. Gross margin was 47.4% compared with 45.7% for the same period in 2018.

Total operating expenses were CNY 468.8 million, an increase of 42.6% from the second quarter of 2018. Selling expenses were CNY 241.7 million, an increase of 15.1% from the second quarter of 2018. Non-GAAP selling and marketing expenses, which excludes share-based compensation expenses, were CNY 236.4 million, an increase of 17.2% from the second quarter of 2018. The increases were primarily due to increase in selling and marketing staff compensation.

G&A expenses were CNY 227.1 million, an increase of 91.2% from the same period last year. Non-GAAP G&A expenses, which exclude share-based compensation expenses, were CNY 118.2 million, an increase of 13.3% from the second quarter of 2018. The increase was primarily due to an increase in staff compensation.

Total share-based compensation expenses allocated to related operating costs and expenses were CNY 115.4 million, an increase of 360.4% from the same period in 2018. The increase was primarily due to new grants of options to employees in the first quarter of 2019.

Operating loss was CNY 168.7 million, an increase of 96.1% from the second quarter of 2018. Operating margin was [negative] (corrected by company after the call) 26.7% compared with negative 16.2% for the same period in 2018.

Non-GAAP operating loss was CNY 53.3 million compared with CNY 61 million in the second quarter of 2018. Non-GAAP operating margin was negative 8.4% compared with negative 11.5% in the same period of the prior year.

Net loss attributable to Puxin Limited was CNY 194.6 million, an increase of 3.3% from the second quarter of 2018. Basic and diluted net loss per ADS attributable to Puxin Limited were CNY 2.28 compared with CNY 2.88 during the same period of 2018.

Non-GAAP net loss attributable to Puxin Limited was CNY 60.7 million compared with CNY 70.9 million during the same period of 2018. Non-GAAP basic and diluted net loss per ADS attributable to Puxin Limited was CNY 0.71 compared with CNY 1.09 during the same period of 2018.

EBITDA was negative CNY 159.8 million compared with negative CNY 156.2 million in the second quarter of 2018. EBITDA margin was negative 25.2% compared with negative 29.5% (sic) [29.4%] for the same period in 2018. Non-GAAP EBITDA was negative CNY 25.8 million compared with negative CNY 38.7 million in the second quarter of 2018. Non-GAAP EBITDA was negative 4.1% compared with negative 7.3% during the same period last year.

Next, we'll move on to the balance sheet. As of June 30, 2019, we have total cash and cash equivalents of CNY 500.6 million compared with CNY 778 million as of December 31, 2018.

Finally, for guidance. For the third quarter of 2019, we expect net revenues to be between CNY 937.5 million to CNY 971 million -- and RMB 971 million, which represents an increase of 40% to 45% year-over-year. This forecast reflects the company's current and preliminary views on the market and operational conditions, which are subject to change.

This concludes our prepared remarks, and now I'll turn the call over to the operator and open the call up for Q&A. Operator, we are ready to take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Sharon Ling of CICC. Mrs. Ling?

The next question comes from Tommy Wong of China Merchants Securities.

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Tommy Wong, China Merchants Securities (HK) Co., Ltd, Research Division - Research Analyst [2]

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I just have 2 questions. First question, can you talk about the gap between the enrollment growth for the second quarter and also the revenue growth? So if you just use the math straight to understand, it seems like pricing has (inaudible) in half. I'm sure there's more to it. And then second question relating to the expenses. Can you just give us a little bit more color on the elevated G&A expense? Because I had the impression that we had a high expense in first quarter and then second quarter maybe come down like we had last year. And if we have elevated expense for the second quarter, is that going to sustain for the second half?

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Peng Wang, Puxin Limited - CFO [3]

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Okay. So thank you for your questions. You have 2 questions. The first is about -- could you repeat the first question? The second is about the G&A expense increase.

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Tommy Wong, China Merchants Securities (HK) Co., Ltd, Research Division - Research Analyst [4]

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Yes. Correct. So the first question is just the gap between the enrollment growth and also the revenue growth? So the enrollment growth has -- seems to be very fast and revenue growth is just a little bit slower on a year-over-year basis?

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Peng Wang, Puxin Limited - CFO [5]

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Okay. For the first question as to the gap between the enrollment growth and the revenue growth. There are 2 underlying reasons for that. First is we are still implementing like promotional classes for those schools we newly acquired to increase exposure in -- of those schools to prospective parents and students. So that makes up a large portion of those -- of the gap. And the second reason is we speak to the strategy of enrollment first, ASP second, means in a highly fragmented market, we focus on grabbing more market share instead of increasing the ASP in an aggressive way. So that explains why we have the faster growth rate of enrollment compared with the revenue.

For your second question about the G&A expenses, G&A expenses -- increase of G&A expenses is mainly attributable to our investment in R&D. We have been investing heavily with our curriculum improvement, our IT technology. Mr. Sha mentioned just now about the PBS system, the Puxin Business System, of which there are dozens of modules to be launched after acquiring or taking control of those schools. So we implemented or launched our technology platforms, [essential curriculum] in those systems one by one. During the process, we -- it takes a lot of time and energy and also money to fully implement those technology -- those systems. That's why we saw an increase in the G&A expenses.

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Operator [6]

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The next question comes from Sharon Ling with CICC.

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Sharon Ling, CICC [7]

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(foreign language)

I have 2 questions regarding the upcoming quarters. So first question is regarding the development plan for the third quarter and also I wonder are we able to achieve positive net profit in the upcoming quarter? And also the [sites.] Could you please talk about the online education product the company offers? And also what do you think of the competitive landscape of the online education market? And does it have any effect on the company?

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Peng Wang, Puxin Limited - CFO [8]

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Thank you for your questions and you're so considerate to put it up in bilingual ways. But your first question about the -- you had the guidelines for -- guidance for the third quarter profits or the bottom line. We are looking at a positive bottom line by the end of third quarter. I cannot give you the exact number of the profits of third quarter, but we are looking at the positive one, a [scalable] one, [meaning] for profits in the third quarter. That's for the first -- for your first question.

The second question is about the online strategy or online programs at Puxin. As Mr. Sha said just now, we take online programs or online platform as a strategic platform or a strategic investment within Puxin. So first of all, we launched our online platform about 2 quarters -- 3 quarters ago and we are very patient in several ways. First of all, our online platform, the ultimate goal is to serve our clients, parents, students in a better way to find the balance -- the delicate balance between the offline service and online programs. So that's our ultimate goal. So we are not rushing for profits or revenues. Secondly, for our online programs, we think one of the key difference in our programs is we are not looking at a 100% online program or curriculum. Instead, we believe as -- we believe that a great portion of our students are in the primary schools or middle or high schools. They are not that disciplined to take purely online programs all by themselves or without the guidance of their parents. So our program -- online programs start with the -- an initiative to merge online curriculum with offline service.

Thirdly and finally as to the possible influence or the competitive landscape of the industry. Yes, I have to admit that online programs are competing with offline programs in terms of the same venue, the same subject or the same learning period.

But there are 2 things we'd like to highlight is -- First is online programs or online learning is not the enemy of offline. In contrast to that, online programs, offline programs, they are both tools for learning, for the improvement of students. So instead of competing with each other in the long term, they are complementary to each other. Secondly, we believe that online programs in order to be really effective, they need to find a way to cooperate or kind of merge with the offline programs, given the fact that a lot of students in the K-12 after-school tutoring industry are teenagers or even younger. So that's our understanding of the landscape.

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Sharon Ling, CICC [9]

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Thank you for the detailed information. I would like to add one more question regarding the Global Education. Could you please give us the description -- briefly, introduction on the current situation of Global Education?

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Peng Wang, Puxin Limited - CFO [10]

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Yes. Sure. As you may well know, we bought Global Education from Pearson in the third quarter of 2017, roughly 2 years ago. At the time of acquisition, Global Education's top line was around RMB 600 million, with net loss of CNY 120 million or even plus. The -- it's kind of exactly the time. After 2 years, we are looking at a 20% plus growth rate in terms of the top line for Global Education this year. And more meaningfully, we are expecting a next to breakeven of Global Education by the end of 2019, means compared with RMB [19] million net loss last year, we are looking forward to the next to breakeven performance of Global Education by the end of this year. Yes, of course, there's a lot of effort put in during the process. But luckily, we are turning around this trend.

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Operator [11]

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I would now like to turn the conference back over to Claire. Please go ahead.

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Claire Yung, ICA [12]

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Okay. We received some questions from investors before conference call today and management team would like to take this opportunity to answer them for us. So the question is how do you explain the improvement in non-GAAP profit/loss this quarter?

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Peng Wang, Puxin Limited - CFO [13]

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Okay. Should I answer questions one by one or one for all?

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Claire Yung, ICA [14]

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There will be just this one question.

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Peng Wang, Puxin Limited - CFO [15]

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Okay. So about the non-GAAP improvement?

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Claire Yung, ICA [16]

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Yes. I'll repeat the question again. How do you explain little improvement in non-GAAP profit/loss this quarter?

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Peng Wang, Puxin Limited - CFO [17]

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Okay. Actually, our gross profit increased by 26% year-over-year for the first quarter and by 23.6% for the second quarter. As Mr. Sha mentioned just now, gross margin reached 47.4% in the second quarter. And for the first half of the year, it's 46.5%. Total operating expenses in the first quarter decreased 24% year-over-year or 12.6% for the second quarter of this year.

Accordingly, the net loss attributable to Puxin Limited narrowed by 14.4% in the second quarter. Given that our revenue grows steadily, we have already seen a key improvement in operating loss, meaning we narrowed the net loss while we increase our revenues steadily over the previous quarters.

So in non-GAAP terms, our EBITDA was only negative CNY 25 million in the second quarter of this year. If we look at the investment we made in our online school business, which is over [to CNY 20 million --] in other words, our non-GAAP EBITDA excluding the investment in online business is about negative CNY 5 million or next to breakeven. Yes, I think that explains the improvement in non-GAAP profits.

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Claire Yung, ICA [18]

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Okay. We have one more question. What's the general situation of your study abroad program?

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Peng Wang, Puxin Limited - CFO [19]

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Okay. The study abroad business?

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Claire Yung, ICA [20]

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Yes.

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Peng Wang, Puxin Limited - CFO [21]

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Yes. Okay. Yes. As I have explained to the question raised by a CICC analyst, the study abroad business including -- mainly including study -- Global Education and ZMN, which in Chinese (foreign language), they contributed to a great portion, if not all, of the net loss of our study abroad business line because -- yes, at the time of acquisition in 2017, those 2 institutions or companies added up to almost RMB 200 million in net loss. Yes. As to -- for Global Education, we have talked about that in detail just now. We are looking at a 20-plus increase in terms of top line and the next to breakeven in terms of bottom line.

For -- ZMN is still making loss by now and will be making loss by the end of this year. We are happy to say its cash revenue has been steadily growing. For example, as we disclosed in the first quarter earnings release, the -- ZMN saw a 34% increase in cash revenue, but its revenue grow only by 1% due to the business nature of the ZMN. Because in essence, ZMN is the high-end university or college placement and consulting firm. So as revenue could be recognized over a period of 2 or sometimes 2.5 years as students usually coming to us at grade 9 or Grade 10, but our service could be only completed or finished by Grade 12 before they enter into colleges or universities in the United States or Commonwealth countries.

So in that way, ZMN especially, its revenue could be recognized at a lower speed -- much slower speed or slower rate compared with cash revenue.

So in one word, Global Education, which the -- which has been the largest acquisition we've ever made will be breakeven -- next to breakeven by the end of this year and a 20-plus increase in the top line, while ZMN will be still making loss by the end of this year, but we are expecting a breakeven or above in terms of the bottom line of ZMN in the year 2020 because its cash revenue will be steadily recognized on its P&L. So that's the general -- the whole picture -- the general picture of study abroad business line.

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Operator [22]

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This concludes our question-and-answer session. I would now like to turn the conference back over to Claire for any closing remarks. Please, go ahead.

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Claire Yung, ICA [23]

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Thank you, operator. In closing, on behalf of the entire management team, we'd like to thank you again for your participation in today's call. If you have any further inquiries in the future, please feel free to contact us. Thank you.

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Operator [24]

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The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.